Continuing his latest Business Advice series, Grid Law founder David Walker discusses the pros and cons of buying a franchise when starting a new business.
Statistics say that if you’re starting your own business, the odds are stacked against you. As entrepreneurs, we all believe we’re going to beat the odds by offering a better product, service or by building a stronger brand than our competitors.
Sadly, despite this confidence, very few businesses are as successful as we want them to be. However, if you want to start a business, there’s one way to dramatically improve your chances of success. That is to buy a franchise.
Starting a business as a franchisee is not for everyone, but it should be a serious consideration, especially if you’re new to business
The benefits of buying a franchise compared to starting your own business
Whether you start your own business or buy a franchise, you will still be the business owner and its success or failure will be down to you. However, with a franchise, instead of developing your own products, service and brand, you will be taking a licence of an existing brand and business model.
When considering buying a franchise, this is one of the first decisions you will have to make.
Do you want to create something new and unique with all the risk that entails? Or, are you prepared work with an existing product or service, even though you know you could probably improve it?
A proven business model
If you are prepared to work with a proven brand and business model, you don’t have to worry about developing a product or building a brand. You don’t have to carry out market research to find out what your customers really want and you don’t have to go through a process of trial and error to streamline your systems.
With a franchise, all of that has been done for you, so the lead time for your business to become profitable should be substantially shorter.
When you buy a franchise and sign up to the franchise agreement, you’re contractually bound to use the franchisor’s brand and business model exactly as they tell you. You have very little (if any) scope to put your own ideas and personality into the business.
Whist this can seem restrictive, if you’re new to business it can also be an advantage. Most franchisors offer extensive training and provide an operations manual to follow. This makes buying a franchise an excellent opportunity to learn new business skills and eliminate many of the costly errors you might otherwise make if you were starting out all alone.
Starting any business requires a substantial investment. Depending on the type of business you’re starting, you’re likely to need computers, equipment, stock and a deposit for a lease of premises. You will also have to spend money on professional fees, graphic design fees, advertising and insurance to name but a few additional costs.
All of the likely costs will be included in your business plan, but when you buy a franchise you have to budget for the additional cost of the franchise fee. This is the fee payable to the franchisor to purchase the franchise.
Franchise fees vary considerably. They can start at a few hundred or a thousand pounds, but in some cases, it can be a six-figure sum! With most franchises, you also have to budget for paying the franchisor a percentage of your profits and a contribution to a national advertising campaign.
This can give the impression that buying a franchise is an expensive way of starting a business, especially if these fees mean your profit margin on each sale is lower.
However, these fees can easily be offset by the increased turnover that the brand attracts and savings made elsewhere. For example, if the franchisor is carrying out a national advertising campaign for the benefit of all franchisees, you don’t have to incur this cost. You may only need to advertise locally.
The franchisor may also be able to use their size and influence to negotiate far better prices with suppliers than you could achieve on your own.
To fund your start-up, you will no doubt have to invest some of your own money into the venture, but you may also need to borrow more from the bank. Banks can be very risk adverse but if you’re starting a franchise, they will be able to look at the track record of similar franchisees. With a strong franchise, they will have less perceived risk so may lend you more.
To finish up, there are a couple of disadvantages to buying a franchise that must be taken into consideration.
The disadvantages of buying a franchise
The first is what happens to the business if you’re no longer around to run it? In the franchise agreement, there are likely to be restrictions on you selling the business or even passing it to family members. However, these restrictions may be lifted if the new franchisee agrees to undertake the necessary training and can provide adequate financial guarantees to ensure the continued success of the business.
The second consideration is what happens to you, the franchisee, if the franchisor gets into financial difficulties? Although franchise businesses tend to be robust, they are not immune to problems.
Therefore, if you invest in a franchise and the franchisor gets into financial difficulties it’s likely to negatively impact on your business, even if you’re doing well.
As you can see, there are clear advantages to starting a business as a franchisee, but there are risks too. So, if you’re thinking about buying a franchise and have any questions, feel free to email me at firstname.lastname@example.org and I’ll happily answer them for you.
Sign up to our newsletter to get the latest from Business Advice.